When set against another day of bear steepening in the US curve, Monday’s Nasdaq rally looked somewhat awkward. Or maybe it just marked the return of the 2023 zeitgeist.

Until August, this year was defined by a disconnect between big-tech and bond yields, which rose together in counterintuitive fashion.

Long-duration equities aren’t supposed to rally in the face of stubbornly high yields. The Nasdaq 100’s performance (up ~40% at the highs) in the face of persistently elevated US real rates stood out as wholly remarkable.

Simultaneous selloffs in equities and rates this month suggested gravity wasn’t suspended entirely. With both 10- and 30-year reals sporting a two-handle, the Nasdaq stumbled. Rates matter after all. Stocks still have a bond problem.

But August’s shallow equity selloff hardly closes the gap. Tech remains disconnected from rates thanks to momentum generated by the A.I. hype cycle, better-than-expected earnings and the simple fact that last year’s losses were deep enough to stack the odds in favor a rebound.

“Global technology, often highlighted as the most sensitive sector to a rising discount rate after last year’s crash, is the best-performing sector this year, despite rising bond yields,” SocGen’s Andrew Lapthorne wrote Monday, before noting that this month’s equity pullback suggests “the bond yield problem hasn’t gone away.”

Make no mistake: It is a problem. As Lapthorne observed, stocks that benefit from higher yields comprise just 20% of MSCI World market cap, less than half the share commanded by stocks that flourish when bonds yields are low. That’s obviously a function of swollen market caps for mega-tech, and there’s a sense in which it defies reason. “Given that equities are meant to be ‘growth sensitive,’ this seem backwards,” Lapthorne remarked. “It also means investors still have a positive bond/equity correlation to contend with.”

This is, of course, the result of decades spent in a macro regime defined by lackluster nominal growth in the developed world, subdued inflation, lower yields and easy monetary policy. That conjuncture drove up valuations for growth stocks such that the “broad” market is now basically just a giant, leveraged long duration bet.

If the macro regime shifted in the 2020s such that hotter nominal growth and elevated inflation demand structurally higher rates, the foundation upon which the post-GFC bull market was built would be shaken. Whether and to what extent the equity market is capable of adjusting to a new reality is debatable. At the least, it’s reasonable to suggest that some of the valuation premium illustrated by the left-hand figure above would disappear. After all, Lapthorne noted, it “did not exist historically.”

“We find it very difficult to be bullish on the [S&P] without suspending our fundamental framework,” Morgan Stanley’s Mike Wilson wrote Monday, referencing cycle-high Treasury yields. “We think it’s important to ask: What is the message the move in rates is sending as it pertains to equity markets?” he went on, suggesting that if the move up in real rates persists, and it’s not a function of expectations for better growth outcomes, that’d be “one more reason to expect stocks to reset lower on valuations.”

Coming quickly full circle, Monday offered a rather stark reminder of why it’s dangerous to make assumptions based on fundamental relationships that “should” hold. All else equal, you’d expect new highs for US yields to spell more losses for equities — that’s this month’s trade, after all. But all else wasn’t equal. The Treasury selloff was hard to interpret given seasonally-thin (if not awful) volumes and the overhang from the neutral rate discussion in the context of Jackson Hole. On the equities side, stocks were buoyed by a 15% move in Palo Alto and a raucous, pre-earnings rally for Nvidia. The result: 2023’s “yields up, tech up” zeitgeist was restored. At least for a day.